5G and Beyond

Loss-Making Ericsson Still Short on Vision

Ericsson's misfortunes continued on Thursday as the company reported another sharp fall in quarterly sales and swung to a $180 million net loss, blaming weak demand for mobile broadband products and a fall in licensing revenues for the latest setback.

Net sales in the October-to-December quarter dropped 11%, to 65.2 billion Swedish kronor ($7.4 billion), compared with the year-earlier quarter, and would have fallen 15% without favorable currency movements. For all its ongoing restructuring efforts, Ericsson AB (Nasdaq: ERIC) reported a net loss of SEK1.6 billion ($180 million) compared with a profit of SEK7 billion ($790 million) for the same period a year ago.

Table 1: Ericsson's Headline Figures for Q4 (SEK Billions)

Q4 2016 Q4 2015 YoY change
Revenues 65.2 73.6 -11%
− of which networks 32.4 37.3 -13%
− of which services 29.4 30.7 -4%
− of which support solutions 3.4 5.6 -39%
Gross income 17.0 26.7 -36%
Gross margin 26.1% 36.3% -10.2 percentage points
Operating income -0.3 11.0 -103%
Operating margin -0.4% 15.0% -14.6 percentage points
− of which networks 2.0% 19.0% -17 percentage points
− of which services 1.0% 8.0% -7 percentage points
− of which support solutions -12.0% 30.0% -42 percentage points
Net income -1.6 7.0 -123%
Source: Ericsson.

Despite a dividend cut, Ericsson's shares opened 3.9% higher in Stockholm and were trading up 1.8% at the time of publication. Perhaps fearing worse, investors may have taken heart from cost-cutting progress and the expectation that conditions in some markets will prove more favorable this year than last. But the stock has a long way to go before it recovers: Ericsson's share price has lost about 29% of its value during the past 12 months.

The earnings update was the first since Börje Ekholm took charge earlier this month and may have disappointed those hoping Ericsson's new CEO would have more to say on his strategic plans for reinvigorating the ailing Swedish equipment maker. (See Eurobites: Ekholm Takes the Reins at Ericsson.)

Amid some speculation he is preparing Ericsson for an eventual sale, Ekholm confirmed suspicions that a chief focus will be further cost cutting at the company, noting in his official statement accompanying the quarterly results that he plans to prioritize "profitability over growth." (See Is Ekholm Ericsson's Savior or Seller? and Cost Cutting Must Continue, Says Ericsson's New CEO.)

But the ultimate goal, he insisted, is to amass capital for investment in future growth areas. "The priorities are to make sure we can invest enough capital in the areas where we must win," he told analysts earlier today. "We have strong R&D functions and product offerings but we must be competitive in five to ten years and that means having more attractive profitability."

Nevertheless, while Ekholm singled out 5G as an area in which Ericsson must be the market leader, he admitted that he has yet to come up with a clear vision for the company. "This is work we are doing right now, and I enter with some ideas, but the reality is that we need to make it a strategy we can execute on," he said. "It might be disappointing that we don't say this is exactly what we will do, but it is more important to make sure we can execute so please bear with us."

Ericsson has been toiling in markets beset by economic and cyclical slowdowns, as customers rein in spending on mobile networks in advance of 5G investment cycles. It has also failed to address the competitive challenge from Asian rivals, particularly China's Huawei Technologies Co. Ltd. (See Beginning of the End for Ericsson?)

Following a sequence of gloomy earnings updates, Ericsson dispensed with erstwhile CEO Hans Vestberg in June 2016, appointing Ekholm as a full-time replacement in October. (See Ericsson Appoints Investor AB's Ekholm as New CEO.)

But the task facing the new CEO -- an acolyte of the Wallenberg family, one of Ericsson's biggest shareholders through its Investor AB investment firm -- is immense. (See 10 Key Tasks for Ericsson's New CEO.)

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